In the past 2 weeks I’ve spoken at 6 different producer meetings in Iowa, Minnesota and South Dakota. At every meeting one of the topics of conversation around the refreshment table was ‘when will prices improve’.
As readers of this blog know, I don’t attempt to forecast prices. However, I do spend time thinking about the structure of the industry and who is making decisions in the industry.
As I think about the large numbers of pigs coming to slaughter (2.16 million last week), I can’t help but speculate on who will remain in the business of pork production long term. It appears to me that the weak link in the various production models in the US industry is the weaned pig for sale contract.
In this model, production of weaned pigs is a profit center, with the weaned pig supplier selling pigs to a wean-finish producer based on a contract. While intentions are always good by both parties when the contracts are signed, over time either the buyer or seller is always unhappy relative to quoted open market prices.
At the same time, this production system is most at risk from lenders, in that they are often financed independently. In a farrow-finish situation, the lender has a look at all costs associated with pork production and has participated in all financial decisions.
In the sale of weaned pig model, the lender for each segment makes a decision independent of the other. This suggests that if profitability doesn’t return to pork production in the near future, lenders to those purchasing pigs may be reluctant to continue to finance the purchase under the terms of the purchase contract. As I’ve heard more than one lender say – why should I lend you money for a guaranteed loss.
So far, purchasers of weaned pigs often have the advantage of growing their own corn for consumption by the weaned pigs and having the manure from the pigs fertilize the crop acres used to grow the corn. As one producer told me this winter – for years pigs financed my cropping habit, this year my crops financed my pig habit.
However, this financing of habits can only go so far. I think the chink in the armor of the ‘last man standing’ mentality of the swine industry is the weaned pig sale contract. Lenders will begin refusing credit to pig purchasers if the markets don’t improve relatively soon. This suggests that sow units based on weaned pig sales will be among the first to close their doors if we must liquidate more females in order to get a return to profits.